ES 301

ASSIGNMENT #1 (40 pts)

Solve the following problems by showing your solution.

Problem 1. (5 pts)
RKI Instruments borrowed $3,500,000 from a private equity firm for expansion of its manufacturing
facility for making carbon monoxide monitors/controllers. The company repaid the loan after 1 year with
a single payment of $3,885,000. What was the interest rate on the loan?
SOLUTION:
Interest=amount owned now− principal¿ 3885000−3500000¿ 385000
385000
Present interest rate= × 100 %=11 % per year
3500000

Problem 2. (10 pts)

Identify the four engineering economy symbols and their values from the following problem statement.
Use a question mark with the symbol whose value is to be determined. Thompson Mechanical Products is
planning to set aside $150,000 now for possibly replacing its large synchronous refiner motors whenever
it becomes necessary. If the replacement is not needed for 7 years, how much will the company have in its
investment set-aside account, provided it achieves a rate of return of 11% per year?
SOLUTION:
principal=$ 150000interest rate=11 %time=7 yrs F=P ( 1+i )n F=$ 150000 ( 1+.11 )7
F=$ 311424.02

Problem 3. (5 pts)
A mechanical device will cost $20,000 when purchased. Maintenance will cost $1000 per year. The
device will generate revenues of $5000 per year for 5 years. The salvage value is $7000. Create a cash
flow diagram using the purchaser viewpoint.
CASH FLOW: $ 7,000

$ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000

$ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000

$ 20,000
Problem 4. (5 pts) 5 years
Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays simple
interest, what interest rate would be required for the amount to grow from $60,000 to $90,000 in 5 years?
SOLUTION:
P=$ 60,000S . I =$ 90,000−$ 60,000¿ $ 30,000t=5 yrs
PTR $ 60,000 (5 )( R ) $ 3,000,000=$ 300000 R
S.I= $ 30,000= R=10 %
100 100 $ 300000
Problem 5. (5 pts)
If interest is compounded at 20% per year, how long will it take for $50,000 to accumulate to $86,400?
SOLUTION:
P=$ 86,400 F=$ 50,000i=20 %
0.23754=0.07918 n
n n
F=P ( 1+i ) $ 86,400=$ 50,000 ( 1+.20 ) log ( 86,400
50,000 )
=n(log 1.20)
0.07918
n=3 yrs

Problem 6. (6 pts)
Three different bank loan rates for electric generation equipment are listed below. Determine the effective
rate on the basis of the compounding period for each rate.
(a) 9% per year, compounded quarterly.
r 9
CP= = =2.25 %
m 4

(b) 9% per year, compounded monthly.

r 9
CP= = =0.75 %
m 12

(c) 4.5% per 6 months, compounded weekly.

52 weeks, 6 months
52
m= =26 weeks
2
r 9
CP= = =0.173 %
m 26

Problem 7. (4 pts)
Your company is AA-rated by a credit-rating agency, and must borrow money according to the table 1
provided if it will start several projects that have been proposed. See the following table 2 for each project
proposals project description, their duration and anticipated return:

Which projects should be undertaken and why?

- New delivery vehicles are the project that should be undertaken, since it has the highest expected
return of 9% over a 5-year period. However, as indicated in table 1, the 5 year AA has an interest
rate of 2.22 percent, meaning that the firm will still be able to achieve a higher revenue return at
the end of the project.